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Why Chevron Corporation (NYSE:CVX) Is A Financially Healthy Company

Simply Wall St

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Chevron Corporation (NYSE:CVX), a large-cap worth US$230b, comes to mind for investors seeking a strong and reliable stock investment. Most investors favour these big stocks due to their strong balance sheet and high market liquidity, meaning there are an abundance of stock in the public market available for trading. These firms won’t be left high and dry if liquidity dries up, and they will be relatively unaffected by rises in interest rates. Using the most recent data for CVX, I will determine its financial status based on its solvency and liquidity, and assess whether the stock is a safe investment.

Check out our latest analysis for Chevron

Does CVX Produce Much Cash Relative To Its Debt?

Over the past year, CVX has reduced its debt from US$40b to US$37b – this includes long-term debt. With this debt payback, the current cash and short-term investment levels stands at US$8.8b to keep the business going. Moreover, CVX has produced cash from operations of US$31b during the same period of time, leading to an operating cash to total debt ratio of 82%, signalling that CVX’s current level of operating cash is high enough to cover debt.

Can CVX pay its short-term liabilities?

With current liabilities at US$30b, the company has been able to meet these obligations given the level of current assets of US$34b, with a current ratio of 1.12x. The current ratio is calculated by dividing current assets by current liabilities. For Oil and Gas companies, this ratio is within a sensible range as there's enough of a cash buffer without holding too much capital in low return investments.

NYSE:CVX Historical Debt, June 14th 2019

Is CVX’s debt level acceptable?

CVX’s level of debt is appropriate relative to its total equity, at 21%. CVX is not taking on too much debt commitment, which can be restrictive and risky for equity-holders. We can check to see whether CVX is able to meet its debt obligations by looking at the net interest coverage ratio. Preferably, earnings before interest and tax (EBIT) should be at least three times as large as net interest. For CVX, the ratio of 23.09x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes CVX and other large-cap investments thought to be safe.

Next Steps:

CVX’s high cash coverage and appropriate debt levels indicate its ability to utilise its borrowings efficiently in order to generate ample cash flow. Furthermore, the company exhibits an ability to meet its near-term obligations, which isn't a big surprise for a large-cap. This is only a rough assessment of financial health, and I'm sure CVX has company-specific issues impacting its capital structure decisions. I suggest you continue to research Chevron to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for CVX’s future growth? Take a look at our free research report of analyst consensus for CVX’s outlook.
  2. Valuation: What is CVX worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CVX is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.